What is Foreign Exchange?
Foreign Exchange is the simultaneous buying of one currency and selling of
another. The world's currencies are on a floating exchange rate and are
always traded in pairs, for example Euro/Dollar or Dollar/Yen. With a daily
average turnover of approximately US$1.9 trillion1, the Foreign Exchange
market, also known as the "Forex" or "FX" market, is the largest financial
market in the world.
Where is the central location of the FX Market?
Unlike the stock and futures markets, FX Trading is not centralized on an
exchange. Due to the fact that transactions are conducted between two
counterparts over the telephone or via an electronic network, the FX market
is considered an Over the Counter (OTC) or 'Interbank' market.
Who are the participants in the FX Market?
The reason that the Forex market is referred to as an 'Interbank' market
is due to the fact that historically it has been dominated by banks,
including central banks, commercial banks, and investment banks. However, the
percentage of other market participants is rapidly growing, and now includes
large multinational corporations, global money managers, registered dealers,
international money brokers, futures and options traders, and private
speculators.
When is the FX market open for trading?
Forex is a true 24-hour market and trading begins each day in Sydney, and
then moves around the globe as the business day begins in each financial
center- first to Tokyo, then London, and finally New York. Unlike any other
financial market, investors can respond to currency fluctuations caused by
economic, social, and political events at the time they occur - day or night.
What are the most commonly traded currencies in the FX markets?
The most frequently traded or 'liquid' currencies are those of countries
with stable governments, respected central banks, and low inflation.
Nowadays, over 85% of all daily transactions involve trading of the major
currencies, which include the US Dollar, Japanese Yen, Euro, British Pound,
Swiss Franc, Canadian Dollar and the Australian Dollar.
Is Forex trading capital intensive?
No. Zaner requires a minimum deposit of just $2000 for opening a
regular forex trading account.
Zaner enables currency trading to be conducted on a highly leveraged
basis. You are able to select the degree of leverage or gearing that you wish
to employ in trading. Unless you specify otherwise, Zaner sets your
leverage level at Zaner Group's most lenient requirement. However, it is
important to remember that while this type of leverage allows investors to
maximize their profit potential, the potential for loss is equally great.
What is Margin?
Margin is a performance bond, or good faith deposit, to ensure against
trading losses. The margin requirement allows you to hold a position much
larger than your actual account value. Zaner' s online trading platform
performs an automatic pre-trade check for margin availability, and will normally only
execute the trade if you have sufficient margin funds in your account. The
system also calculates the funds needed for current positions and displays
this information to you in real time. In the event that funds in your account
fall below margin requirements, the Zaner trading station will close all
open positions. This should prevent your account from ever falling below the
available equity even in a highly volatile, fast moving market.
What does it mean have a 'long' or 'short' position?
A long position is simply one in which a trader buys a currency at one
price and aims to sell it later at a higher price. In this scenario, the
investor benefits from a rising market. A short position is one in which the
trader sells a currency in anticipation that it will depreciate. In this
scenario, the investor benefits from a declining market. However, it is
important to remember that every FX position requires an investor to go long
in one currency and short the other.
What about terms like "bid/ask", "spread", and "rollover"?
Zaner Group has an extensive Glossary, under the New to Forex section that
provides detailed definitions of all Forex related terms.
What is the difference between an "intraday" and "overnight position"?
Intraday positions are all positions opened and closed before 5:00 PM EST
(rollover cutoff i.e. the end of the international trading day). Overnight
positions are positions that are held through 5:00 PM EST (rollover cutoff),
which are automatically rolled by Zaner Group.
How are currency prices determined?
Currency prices are affected by a variety of economic and political
conditions, but probably the most important are interest rates, inflation and
political stability. Sometimes governments actually participate in the Forex
market to influence the value of their currencies, either by flooding the
market with their domestic currency in an attempt to lower the price, or
conversely buying in order to raise the price. This is known as Central Bank
intervention. Any of these factors, as well as large market orders, can cause
high volatility in currency prices. However, the size and volume of the Forex
market makes it impossible for any one entity to "drive" the market for any
length of time.
How do I manage risk?
The limit order and the stop loss order are the most common risk
management tools in FX trading. A limit order places restriction on the
maximum price to be paid or the minimum price to be received. A stop loss
order ensures a particular position is automatically liquidated at a
predetermined price in order to limit potential losses should the market move
against an investor's position. The liquidity of the Forex market ensures
that limit order and stop loss orders can be easily executed.
What kind of trading strategy should I use?
Currency traders make decisions using both technical factors and economic
fundamentals. Technical traders use charts, trend lines, support and
resistance levels, and numerous patterns and mathematical analyses to
identify trading opportunities, whereas fundamentalists predict price
movements by interpreting a wide variety of economic information, including
news, government-issued indicators and reports, and even rumors. The most
dramatic price movements, however, occur when unexpected events happen. The
event can range from a Central Bank raising domestic interest rates to the
outcome of a political election or even an act of war. Nonetheless, more
often it is the expectation of an event that drives the market rather than
the event itself.
How often are trades made?
Market conditions dictate trading activity on any given day. As a
reference, the average small to medium trader might trade as often as 10
times a day. Most importantly, by offering no commission* and offering tight
spreads, Zaner Group customers can take positions as often as necessary
without worrying about excessive transaction costs.
How long are positions maintained?
As a general rule, a position is kept open until one of the following
occurs: 1) realization of sufficient profits from a position; 2) the
specified stop-loss is triggered; 3) another position that has a better
potential appears and you need these funds.
I am interested in foreign exchange trading, but would like some
additional information. Any suggestions?
In the New to Forex section we describe the foreign exchange market in
some detail. In order to gain a practical understanding of foreign exchange
trading, there is no better way than to open a demo account, where you can
experience what it's like to trade the Forex market without risking any
capital.
How does the Margin Call work?
If the equity balance in your account falls below the margin requirement,
a margin call will be generated. In the event that an account exceeds its
maximum allowable leverage, ALL open positions will be liquidated
immediately, regardless of the size or the nature of positions held within
the account.
* Zaner is compensated for its services through the bid/ask spread.
1According to: BIS Quarterly Review: Why has FX trading surged? Explaining the 2004 triennial survey |
